Rail on a roll

“Looking ahead, our franchise should continue to benefit from a broad and balanced customer base as well as from rail‘s inherent advantages over other transportation modes: safety and reliability, fuel efficiency, and environmental sustainability.” -Charles W. “Wick” Moorman, CEO for Norfolk Southern

Keeping an eye on the competition is always a smart thing to do in any business, and for truckers, that eye should be trained not just on fellow big rig operators but freight locomotives as well.

It‘s been a banner year for the railroads so far, despite the run-up in oil prices and the softening U.S. economy - and the reasons are pretty simple, too. For starters, strong export demand for bulk commodities, such as coal and agricultural goods, is generating a lot more freight revenue for railroads, while shippers seeking to cut down on transportation costs are shifting over to intermodal where possible.

That truck-rail modal combination is definitely something truckload carriers and well as private fleets need to keep an eye on going forward, especially in lanes 800 miles or longer, where intermodal is most competitive with trucking.

Take a look at Omaha, NE-based Union Pacific‘s second quarter earnings, for example. Net income increased 19% to $531 million on 13% higher revenues of $4.6 billion compared to the same period in 2007. Five of its six business groups showed big revenues gains: agricultural (up 29%), chemicals (up 14%), energy (up 21%), industrial products (up 9%) and intermodal (up 7%). Only automotive shipments were down (some 9%). Overall, UP said its average revenue per car (ARC) increased 16%, reaching an all-time record of $1,835 per car.

“We expect that our diverse business mix will continue to provide us with opportunities through the year,” said Jim Young, the company‘s chairman and CEO. “Although high fuel prices and a soft economy present challenges, we remain committed to ongoing productivity and customer service initiatives as we look forward to achieving a record year.”

Jacksonville, FL-based CSX Corp. is also seeing a boost across its markets, posting earnings of $385 million on 15% higher revenues of $2.9 billion compared to the second quarter in 2007. “CSX continues to deliver significant value for shareholders and demonstrate the secular strength of our business,” said Michael Ward, chairman, president and CEO, pointing to sustained strong demand for export coal, grain, ethanol, metals and phosphates and fertilizers, as well as solid yield management, as the reason for revenue increases in eight of the its ten markets.

And even though Montreal-based Canadian National watched its net income slide 11% to C$459 million (US$450.7 million), despite a 4% increase in revenues to C$2.09 billion (US$2.05 billion) - no doubt in part because its fuel costs rose 60% compared to last year, to some C$400 million (US$392.7 million) for the quarter - E. Hunter Harrison, CN‘s president and CEO, pointed to intermodal as a bright spot for the railroad.

“Despite the headwinds, we saw double-digit growth in intermodal revenues as a result of new container traffic over the Port of Prince Rupert and continued import strength at the Port of Vancouver, as well as higher volumes of commodities to support oil sands development in Alberta,” Harrison said.

For Norfolk, VA-based Norfolk Southern Corp., despite continued weakness in the automotive- and housing-related industries - which contributed to a 2% reduction in traffic volume compared with the same quarter last year - higher average revenue per unit more than offset the effect of reduced volumes. Net income reached $453 million on 16% higher revenues of $2.8 billion compared to the second quarter of 2007.

NS‘s general merchandise revenues increased 10% to a record $1.5 billion, coal revenues climbed 34% to a record $775 million, and intermodal revenues increased 11% to a record $532 million, said Charles “Wick” Moorman, the company‘s CEO.

Back in June at the Merrill Lynch Global Transportation Conference, Moorman said in a speech to analysts that it‘s his belief that the transportation marketplace has changed fundamentally in ways that favor the railroad business - and these second quarter results may offer some proof for that, especially for intermodal service.

“There are clear signs of escalating intermodal demand across our network, and in particular within the eastern half of our market,” he said. “Five-dollar-a-gallon diesel fuel provides a powerful incentive to ship by rail, and we are introducing new intermodal lanes and products, and we are improving our service performance to take advantage of additional opportunities.”

He said the growing strength of U.S. exports, the re-emergence or at least strengthening of North American manufacturing, and a focus on what is being called “regional production” - the idea that goods should be produced closer to the point of consumption in order to reduce transportation costs - is changing transportation across the U.S.

“We‘ve already seen the resurgence in exports, particularly in commodities, as empty containers on both coasts have now become much more sought after,” Moorman noted. “How far the concepts of more manufacturing and regionalism progress is anybody‘s guess, but they are changes that our company can and should be preparing for.”

(Charles "Wick" Moorman, Norfolk Southern's CEO.)

One of the biggest changes can be encapsulated in one word, he noted - GREEN. And that is going to be a big battleground between trucks and railroads, as evidenced by Moorman‘s comments.

“Particularly with what will be a constantly increasing focus on carbon emissions, railroads are clearly the greenest form of surface transportation, and to our friends who don‘t particularly take to the carbon discussion, we have an equally compelling case in terms of energy independence,” he said. “Green/energy credentials are resonating even more strongly with public policy leaders and I believe that we can capitalize on those credentials to our, as well as the environment‘s, advantage.”

So keep an eye on those locomotives going forward. While intermodal can be a trucker‘s best friend, it can also be a big competitive advantage for the railroads as well - alongside a new focus on environmentalism too.